What Real Rate of Return Is Earned by a One-Year

question 96

Multiple Choice

What real rate of return is earned by a one-year investor in a bond that was purchased for $1,000, has a coupon rate of 8%, and was sold for $960 when the inflation rate was 6%?

• A) -1.89%
• B) 1.92%
• C) -2.66%
• D)2.47%

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Definitions:

Average Rate of Return

A financial metric used to evaluate the profitability of an investment, calculated by dividing the average annual profit by the initial investment cost.

Present Value Factors

Numerical factors used in calculating the present value of a future amount, considering the time value of money.

Internal Rate of Return

The discount rate that makes the net present value of all cash flows (both positive and negative) from a particular project or investment equal to zero.

Present Value

The present-day value of a future cash sum or cash flow sequence, with a given interest rate.